Boston GlobeGag order in broker’s fight with firm voidedRuling may alter arbitration cases

By Beth HealyGlobe Staff / July 1, 2010E-mail|Print|Reprints|Comments () Text size – +In a decision that could have sweeping ramifications in the investment business, a Suffolk Superior Court judge has ruled that Oppenheimer & Co. and a panel of arbitrators overstepped their bounds — and the First Amendment — in banning a Boston broker from discussing details of his dispute with the firm in public.

Tweet Be the first to Tweet this!Yahoo! BuzzShareThisArbitration is the rule of the road in the brokerage industry: It’s a system of handling grievances between firms and their customers or employees that’s meant to sidestep the time and expense of the court system. It also often offers a veil of secrecy, because records and proceedings are largely out of the public eye.

But the New York brokerage firm Oppenheimer & Co. took that secrecy too far, Judge Frances A. McIntyre ruled on Monday. When an arbitration panel awarded Oppenheimer broker James Dever $85,779 for his complaint against the firm, it also said all testimony and documents in the case had to be kept confidential, at Oppenheimer’s insistence.

The gag order “restrains speech’’ and “offends public policy,’’ McIntyre wrote in her decision. She said so broad a confidentiality award “violates public policy, is contrary to legal and constitutional mandates, and exceeds the powers accorded to this arbitration panel.’’

The decision could have an impact not just on brokers but on customers. Across the country, investors routinely sign waivers, promising to take up any dispute with their broker or brokerage firm before a private arbitration panel, rather than in a court of law. And while many customers prefer to have these proceedings remain private, the Massachusetts ruling suggests that firms can’t force clients or brokers to keep quiet about their cases.

An Oppenheimer spokesman said the firm is not currently planning to appeal, but is “reviewing the judge’s invitation to submit a motion to assure that documentation that is protected by privacy laws should remain confidential.’’ He also said, “Oppenheimer’s interest in maintaining the confidentiality of the documentation and testimony with respect to the arbitration proceeding was to assure the confidentiality of its clients’ information in accordance with privacy laws and regulations.’’

Dever’s lawyer, Angela H. Magary, called the decision a victory for the “little guy.’’

“This is a big deal,’’ she said. “When you become an employee of the financial services industry, you’re not checking all your rights at the door.’’

For Dever, the decision means being able to fight what he says is an unfair mark on his record. He was manager of Oppenheimer’s Boston office until 2007. He was pushed out, he said, after cooperating with a regulatory investigation of the firm, against the orders of higher-ups.

In that case, Oppenheimer had to pay a $1 million fine for failing to supervise a broker. Massachusetts securities regulators marked Dever’s record in the matter, even though he was not charged. Dever wants to clear his name, but he could not use any documents or testimony from the case because of the confidentiality order.

After Dever talked to the Globe about his case in 2008, the lead arbitrator threatened him with “Draconian fines’’ if he discussed the case publicly. According to a transcript, the arbitrator also said, “If you want to fight [and] you want to tangle with this panel, you may.’’ Now Dever may be able to move forward, though the records remain sealed for 45 days.

A spokesman for the Financial Industry Regulatory Authority, which oversees brokers, declined to comment on the court decision late yesterday. FINRA’s guidelines allow for confidentiality, but only if both parties in an arbitration agree to it.

Stuart D. Meissner, a New York lawyer who represented Dever in the arbitration, applauded the judge’s decision.

“It definitely will have an impact and will be utilized in many arbitrations going forward,’’ he said. “Firms in general try to bully arbitrators to make many things in cases before them confidential, when they really do not meet the legal threshold of being confidential.’’

Meissner said he hopes the decision will “make firms think twice in pursuing such orders.’’

Recent advertisements by the CFP Board of Standards, the group that licenses certified financial planners, or CFPs, trumpet their “fiduciary duty.” One ad states CFPs are “ethically bound to put your interests first.”

Is it merely an advertising campaign, or is it real?

A fiduciary is a person to whom property or power is entrusted for the benefit of another. On paper, CFPs who provide financial-planning services are held to a fiduciary standard, defined by the CFP Board as “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.” While that may appear to settle the matter, this rather lofty standard must also be enforced to make it a reality in practice. (Full disclosure: I hold a CFP license.)

Yet putting someone else’s best interests ahead of one’s own is difficult, if not impossible, for some people. Duke University behavioral economist Dan Ariely illustrates this quite well in his recent book, The Honest Truth About Dishonesty, and in the article “Why We Lie,” which appeared in The Journal on May 26.

Consider one case I recently mentioned in an AARP Magazine story, in which a CFP provided financial-planning services to a client and represented that he was acting as a fiduciary. This client started to get suspicious of the advice he was receiving, and came to me for a second opinion; I then became his adviser. Among the products the original CFP sold to the client was an annuity. Apparently, the CFP couldn’t decide whether to charge a commission or an ongoing percentage of assets, so he did both.

This practice is known as “double dipping.”

The client was paying an estimated 5.29% annually in fees, yet had no way of knowing this without reading hundreds of pages of technical disclosure and a book the CFP gave him. Once the client was informed of the situation, he expressed his desire to be extricated from the investment. Then the CFP lowballed the surrender penalty the client would need to pay to get some of his money back. Shortly afterward, the CFP instructed the client not to contact him again.

Once the multibillion-dollar insurance company and broker-dealer were made aware of the situation, they voluntarily offered the client his money back plus a very generous interest rate. (The settlement included a confidentiality clause that doesn’t allow me to identify these household names.)

As part of the agreement, however, the client insisted on being allowed to file complaints against the CFP. The client acknowledged that he had been fully compensated for this experience, but did not want the CFP to continue to do to others what he had done to him.

In fact, both the client and I filed separate complaints with the CFP Board and other regulatory bodies. Not surprisingly, over the following year, the other regulatory bodies didn’t take action. What was surprising was that not a word came from the CFP Board. In following up with the board, I was told they had lost the complaint I filed and hadn’t yet gotten to the client’s complaint. Eventually, the client received a letter that no public action would be taken against this CFP.

In my mind, this wasn’t a close call. How could it possibly have been determined that the CFP acted in the best interests of the client? The only difference between this case and the broker without fiduciary duty is that at least the broker never claimed to be working in the client’s best interests.

I spoke to Michael Shaw, managing director, Professional Standards & Legal, at the CFP Board. He stated that that he couldn’t comment on any specific cases due to confidentiality rules, but did note that while the CFP Board did not revoke or suspend the CFP’s license or even issue a public letter of admonition, it was possible the CFP received a private censure. Though Shaw admitted it would be unusual that a public sanction was not issued for a finding of breach of fiduciary duty, he said it was possible that such a breach would not have resulted in a public sanction if there were extenuating circumstances.

Kevin Keller, the CEO of the CFP Board, invited me to participate as a volunteer panelist on the board’s Disciplinary and Ethics Commission, so that I could write about the process from the inside. Being a panelist involves reviewing complaints made against CFP certificants and recommending possible disciplinary sanctions. I initially accepted his invitation – but then I received an agreement to sign giving the CFP Board the right to review and approve the article I would write on the process before publication.

While Shaw told me this was only to confirm that no confidential information was being released, he also said the term was not open to negotiation. This agreement was unacceptable to both The Wall Street Journal and me, and I declined the offer.

Financial planning, like other professions, is wrought with conflicts of interests. Yet other professions provide guidance and rules for dealing with such conflicts. In my view, much more will be needed if financial planners are to reach this lofty goal of being professionals acting as fiduciaries.

Financial planners must examine, disclose and openly debate conflicts of interests between ourselves and our clients. Planners must develop rules as to when that fiduciary standard is breached, such as when fees are too high and not disclosed plainly to the client. If the CFP Board touts fiduciary duty, they must enforce that standard.

The Canadian Foundation for Advancement of Investor Rights was launched in 2008By James Langton | February 06, 2012 11:30The Canadian Foundation for Advancement of Investor Rights was launched in 2008 on the strength of a $3.75-million commitment from the Investment Industry Regulatory Organi-zation of Canada's predecessors, the Investment Dealers Association of Canada and Market Regulation Services Inc. That startup funding was paid out of fines collected by the SROs.Now, FAIR Canada — a vocal champion of investor rights — estimates that it has enough money to get through to the end of the year. But it's under pressure to come up with the funds to sustain itself beyond that point.IIROC has not yet indicated whether it plans to provide FAIR Canada with further funding. But IIROC and the Ontario Securities Commission are the regulators with the fattest wallets, thanks to their enforcement efforts.The fines that regulators collect can't be used to fund their own operations; they must be used for things such as investor education or other matters that benefit the public.The OSC's latest financials show that it has $43.6 million set aside from fines and settlements, earmarked for "the benefit of third parties." Similarly, IIROC has $23.5 million in its restricted fund, mostly from fines and penalties it has collected; this can be spent only on certain things, including underwriting the costs of its disciplinary hearings, one-time capital expenditures, and investor education or research.By comparison, the other major regulators have very little available in such funds. According to the latest financial reports, the B.C. Securities Commission has $2.85 million in its education reserve fund and the Alberta Securities Commission has a zero balance in its restricted cash account. The Mutual Fund Dealers Association of Canada has $541,590 in its restricted fund.IIROC also is sitting on another $32.5 million from the settlements it had reached with several firms to resolve allegations related to the collapse of the asset-backed commercial paper market in 2007. But the money collected by IIROC and the OSC as part of the ABCP settlements is likely to be returned to investors who were harmed, and not be available for general investor education or for funding groups such as FAIR Canada.FAIR Canada will be hoping regulators not only improve their collection performance but that they see fit to spend some of their sanction money on an investor advocate that has become a bit of a thorn in their sides in recent years.— JAMES LANGTON

380. (1) Every one who, by deceit, falsehood or other fraudulent means ... defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,

(a) ... liable to a term of imprisonment not exceeding ten years, where ( a will is involved ) or the value ...exceeds five thousand dollars; or (b) is ...liable to imprisonment for a term not exceeding two years, or (ii) of an offence punishable on summary conviction, where the value ...does not exceed five thousand dollars.

(fraud does not normally apply to the financial industry since it is a criminal offense and financial powers that be typically "avoid" the criminal code with their own "self regulatory" status. By that statement I do not mean that they do not catch some crooks who defraud, but typically they never catch the financial services crooks who defraud the public.)

other flogg (forum/blogg) topics cover most of this stuff, but I thought it time to update some of the cover-ups that are found under canadian securities regulators of today. Here's hoping that we will get a more professional regulatory system shortly:

1. Licensing 90 day "salespeople" and then letting them misrepresent themselves to the public as professionals with a pedigree.2. Allowing those same licensed salespeople to practice predatory commission sales practices upon an unsuspecting public.3. Allowing sale of DSC funds to top the sales charts when equal and otherwise identical funds could be chosen at lesser cost and better results to the customer. (violation of suitability rules)4. Allowing house brand funds to take over a majority of mutual funds sales, for the increased profit to the "house".5. Allowing financial firms to hire trade and lobby groups who then infiltrate the regulatory system posing as regulators, join the commercial crime units to their ends, causing white collar crime to remain often hidden and un-investigated in Canada.6. Not giving salespersons a copy of their license and requiring it be posted in public view for customers.7. July 2009 changing the securities rules in 13 provinces to remove the offending title name of "salesperson" from securities commission documents, and replace it with a more ambiguous term, while not taking action to inform and protect the public from misrepresentation.8. Allowing legal exemptions to firms like Assante (and a thousand others) to do illegal things like rebate (kickback) mutual fund commissions in an effort to move clients over to the house brand funds (where profits are up to 26 times greater to the house).9. Allowing these thousands of legal exemptions without public notice to those eventual customers of these products.10. Allowing these legal exemptions without public input of any kind.11. Allowing those public exemptions without follow up to maintain that the conditions for them (if any) have been met and maintainted.12. Turning the granting of legal exemptions process into a bureaucratic mess which serves to raise money for the commissions and do nothing but damage the public interest.14. Collecting salaries like $446,000 to "exempt" products like toxic sub prime asset backed commercial paper, and let these toxic investments infect our economy, and then joining the self regulatory agency for a salary of nearly $700,000 and "discovering" that dealers did not understand these products. (same person did both recently)13. .......I think I could go on forever with this regulatory system.........what is the point? Congrats to quebec for turning away from the rest and being the most professional and po-active of the bunch at protecting the public. Shame on the rest of you guys for taking your $700,000 salaries from investment dealers and turning a blind eye to the public. You should receive the Bernie Madoff award for self serving behaviors.

this article seems to suggest that Ian Thow approached the most vocal comlainant, and "bribed them" with their own money back, if they promised to drop or retract their complaints against him. In that way he was able to keep his license just a bit longer and keep his scheme afloat. This advocate wants to know how that is different that the big financial players, who drag clients through years of hell (see Markarian case) and most of the time, offer to settle for cents on the dollar IF the client signs a confidntiality agreement. They are thus able to "bribe" clients with their own money and at the same time buy silence on their criminal or fraudulent act. This is not a very high integrity practice by those firms who do this.

Thow's shady clients no excuse for poor investigation: MFDA

January 08, 2008 | Mark Noble

It seems that disgraced advisor Ian Thow bribed clients by returning their investment money if they agreed to retract any complaints. Nevertheless, the MFDA says Thow's dealer, Berkshire Investment Group, still should have conducted a comprehensive investigation into his activities.

Late on Monday, the MFDA issued its rationale for the December settlement with Berkshire which saw the investment firm fined $500,000 due to its failure to conduct a "reasonable supervisory investigation" into Thow's activities. It is believed that Thow is responsible for defrauding clients of more than $30 million.

Both the MFDA investigation and an investigation by the British Columbia Securities Commission emphasize that all of Thow's fraud was committed off-book, with no evidence that anyone at the firm was aware of his improprieties. The MFDA's reasoning for the penalty stems from Berkshire's failure to conduct a proper investigation following the first two complaints it received about Thow, both of which were from investors who were not Berkshire clients.

The first complaint, which Berkshire received in September 2004, was from the lawyer of a wealthy businessman who said his client had accompanied Thow on a fishing trip along B.C.'s coast with three other investors. The lawyer related that his client had been convinced by Thow to invest $1.2 million in shares of National Commercial Bank Jamaica Limited, an investment that was later found to be bogus.

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The investor claimed that other participants in the fishing trip had also bought shares, but the only receipt of the transaction that he was able to provide to Berkshire was for $1.2 million in travel vouchers related to Thow's aircraft leasing business.

According to the MFDA, Berkshire did inform both its legal and compliance departments about the accusation, although no one at Thow's branch was informed of the matter.

One of Berkshire's senior executives did, however, call Thow and inform him of the complaint. Thow said the story was false and that the businessman was "playing hardball" to get the return of money he had used to purchase flight time on Thow's aircraft.

Shortly thereafter the businessman himself called Berkshire's compliance department and said that his lawyer's story was a "misunderstanding." The MFDA says unbeknownst to Berkshire, Thow had repaid the investor $1.2 million in exchange for his retracting the complaint.

The MFDA says that the complaint's withdrawal shouldn't have ended the company's investigation. Berkshire would have been required by the MFDA to obtain written confirmation and documentation corroborating Thow and the businessman's dealings.

The regulator argued in its reasoning that had Berkshire done this, "it would have increased the likelihood that Thow's solicitation of monies for the purchase of investments outside the Respondent and improper outside business activities would have been discovered and Thow would have been prevented from continuing to engage in such conduct while registered as an Approved Person of the Respondent [Berkshire]."

The MFDA says Berkshire received a second complaint about Thow on April 20, 2005, from another investor who was not a client of the firm. This client claimed he had invested $200,000 in the Jamaican bank shares. In this case, Berkshire was given physical evidence, a cheque for $100,000 payable to Thow's company with the words "NCB bank shares" written on the memo line of the cheque.

Subsequently, the investor refused to cooperate with Berkshire's investigation. Unknown to Berkshire, the investor's lawyer was in negotiations with Thow's lawyer to get the investment money back. The investor did get his money back, although he stated that it was not repaid by Thow.

Even without the investor's testimony, the cheque was physical evidence that potentially proved Thow was engaged in off-book securities trading. Indeed, Berkshire's compliance and sales departments proceeded with a meeting with Thow on May 5, 2005, to investigate the complaint. At the meeting, Thow submitted his resignation and refused to answer most of the firm's questions. He said his copy of the cheque didn't have the memo line.

The MFDA insists Berkshire had an obligation to suspend Thow that very day. Instead, it deferred his termination until June 1, 2005. From April 20, 2005, the date the investor launched the complaint, until June 1, 2005, the date Thow was terminated, he managed to bilk investors out of approximately $510,000.

Shaun Devlin, vice-president of enforcement for the MFDA, says it was only the supervisory process of its compliance that failed Berkshire. The rest of its regulatory governance was sound.

According to the MFDA's guidelines on supervisory investigations, "a Member has a duty to conduct a detailed investigation where it receives information to suggest the possibility that the Member or any current or former Approved Person has or may have contravened any provision of any law or has contravened any regulatory requirement."

In the case of Thow, such information came in the form of the accusations by individuals that he was trading securities outside of his approved role with an MFDA member. Devlin says regardless of the clients' undermining Berkshire's investigation, the firm should have proceeded to investigate the allegations with or without their help. He says the MFDA would have identified more compliance issues, which would have merited further investigation.

"If they had conducted an investigation into those matters, they would have found further red flags and then their duty would have obviously continued with regard to other red flags," he says.

The MFDA notes in its reasoning that Berkshire has corrected its supervisory policies. The firm has also been diligent in compensating its own clients burned by Thow. The MFDA investigation concluded Thow took more than $4.3 million from clients of Berkshire. Upon the conclusion of voluntarily initiated mediations with 29 of its clients, Berkshire made payments totalling approximately $4.1 million.

Berkshire is also defending itself against other claims for compensation in both civil litigation and alternative dispute resolution proceedings with clients and non-clients who invested with Thow.

One of the frustrations with this job is some of the most potentially instructive stories can't be made public. Since the stock bubble of 1999 burst, many tales of investor abuse involving leveraged loans have come to my attention.

Too often, the consumer/victim of abuse starts to go down the legal path in an effort to recoup their lost retirement capital. But the closer they get to exposing the villains in court or the press, the more likely they will be
offered a partial settlement.

Once settled out of court, everyone agrees to shut up. The chance to warn other investors is lost because of gag orders the lawyers are allowed to attach to settlement agreements. The perpetrators are free to go their merry way and find new victims.

A source familiar with such behind-the-scenes negotiations says this: "The problem is gag orders are allowed by the financial industry. We're not treating our financial well-being like we treat our medical well being. Can you imagine a medical officer knowing the person working next to you has SARs and not letting you know about it?"

Occasionally, as with the courageous Georgetown, Ontario, pensioner David Meal, the public learns about actual identities.

Meal's story about getting a 9 to 1 leveraged loan from CIBC to buy the Nasdaq late in 1999 has been described here before. However, odds are you'll hear no more about him because the Toronto law firm of Groia & Co. has taken on the case.

My prediction is the whole thing will get swept under the carpet and the name of the CIBC advisor will never be revealed.

Settlements buy silence

A similar case was recently settled out of court. Instead of a retiree it concerned a Baby Boomer couple in Ontario. It also involved leverage and investments made in 1999. As dictated in their agreement, the protagonists declined to talk to me.

We'll call our victims John and Sue (not their real names.) We'll call the advisor Will Leverage, or W.L. for short. He's written at least one financial book and often gives free financial seminars. (Published "authors" often have perceived authority when hosting their asset-gathering seminars.)

Unlike Meal, who saw only the upside of the New Economy in 1999, both Will and his clients were concerned about Y2K''s possible impact on the stock market. The husband worked in the computer industry, which may have been a factor. [Y2K was a concern I shared, as shown in the Krash! book I coauthored then.]

In February, 1999, the couple exhibited an interesting mixture of fear and greed in borrowing $150,000 to buy a "market neutral" hedge fund from @rgentum Management & Research Corp. In 1999, that was the minimum
investment needed for hedge funds sold to sophisticated investors in Ontario. Designed to protect investors, in this instance the rule seems to have backfired. The rules have since changed.

The couple asked Will for a safe, low-risk investment. They planned to increase their risk level to "medium" if Y2K passed without incident. On their Know Your Client form Will described the couple as knowledgeable with
"medium" risk tolerance. The couple didn't learn this until after they sued him.

In Will's defence, @rgentum described the fund as low risk, although it replaced the fund manager for poor fourth-quartile performance (which persists to the present). The fund was prematurely short the technology
sector and suffered losses as the bubble expanded in 1999. It lost 26% that year and continued to lose through most of the years since.

The leverage amplified the couple's losses, which soon passed $100,000. Meanwhile, Will put another $100,000 of the couple's savings in bond funds, which then fell 40%. "He put us into bonds at the worst possible time," Sue told my source. "We now have most of our money in the bank, as we are petrified."

By settling for less than 30% of their losses, the couple chose not to warn other investors. For the advisor, it's cheap hush money.

Worse, because of the gag order, the Ontario Securities Commission and advisor-policing self-regulatory organizations like the Investment Dealers Association and Mutual Fund Dealers' Association know nothing of the case. As my source says, "Will Leverage is free to find new uneducated-in-financial-literacy victims to be in his food chain."

Asked about the advisor, an OSC spokesman would neither confirm nor deny an investigation is proceeding against him.

"Our system in Canada for handling complaints still leaves a lot to be desired," says former OSC commissioner Glorianne Stromberg. "The regulatory process has favoured the industry over investor protection."

But, she adds, the financial industry is "not alone in its cover-up." Doctors can move to another jurisdiction butchering patients, and child molesting teachers can move to different schools.

A spokeswoman for W.L.'s firm confirmed only he is still with them. "We don't comment on something like this to protect the privacy of the individuals."

April 23, 2004
John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
19th Floor
Toronto, ON M5H 3S8
Proposed NI 81-107
Over the years securities regulators have tolerated and encouraged massive concentration
within the Canadian Securities industry, with approximately eighty percent of the
securities business now controlled by the five major banks. It is apparent these entities
are trying to serve too many masters. Conflicts are the natural by-product of this
situation. We continue to make more rules, which drive up compliance costs for
independent organizations and thus reinforce the consolidation trend. The mutual fund
industry is a clear case in point.
We have also forgotten or disregarded history in the creation of the current industry
structure. In the U.S., the Glass-Steagall Act, which separated commercial and
investment banking functions, was put in place to deal with the abuse of banks using their
equity placement (or investment management) capabilities to underpin problem loans
with equity issues.
Clearly, we cannot expect memories to extend back to the Act’s enactment in 1933 but
we should be able to depend upon regulators’ having recall extending to 5 or 10 years.
For example, the T. Eaton Company issued its only IPO in 150 years only to be declared
insolvent one year later. Whatever losses its bankers suffered were reduced by the size of
the $175 million underwriting. It is ironic to note that financial projections used by the
bank-controlled underwriter at the time of the financing were declared to be incorrect
within three months of the deal’s closing. Part of the bankruptcy agreement included the
provision that the underwriter could not be sued.
Laidlaw Inc., one of Canada’s most widely held companies, was declared insolvent when
a bank initiated and advised acquisition (Safety-Kleen) declared its bookkeeping to be
fictitious. Many of the shares held were owned through bank-controlled mutual funds.
The banks aggressively sought recoupment of their loans to Laidlaw and not one spoke
…/2
-2-
up on behalf of the direct or indirect common shareholders, many of whom held shares
through their mutual funds. Clearly, in a crunch, the banks’ priorities were on the side of
getting their loans back at all costs.
Canadian bankruptcy laws, unlike those in the U.S., clearly favor creditors in
restructuring rather than also allowing equity holders some means of partial recoupment.
This fact, when coupled with removing conflict of interest provisions, reinforces this
form of common shareholder abuse. The intent and results in these two relatively recent
issues appear to be lost in the Canadian Securities Administrator’s submission. That is no
surprise.
For 40 years in the Canadian Securities industry, I have watched our major banks always
get what they sought from the securities regulators. This, despite conflicts, trading
abuses, the destruction of agency stock trading, aggressive tied selling (yes, it still exists)
and the negative economic impact for small to mid-sized firms trying to raise capital.
One provision that should be specifically allowed in, however, is the ability of an
investment manager to trade on a principal basis with an affiliate in the fixed income
sector. All bond trading is conducted on a principal basis. It would be chaotic to reinvent
this when one understands that all world-wide trades are conducted in this manner.
In regards to equity trading, principal transactions are becoming the norm on an
institutional basis. In this instance real costs are often hidden from investors and capital is
used to buy business and further consolidate our industry.
Approximately 20 years ago, as banks took over investment firms, I asked the Ontario
Securities Commission: “How powerful do you want the banks to be?”
The question still stands.
Yours truly,
Thomas S. Caldwell, C.M.
Chairman
Cc: The Right Honourable Prime Minister Paul Martin
Premier Dalton McGuinty
Honourable Greg Sorbara, Minister of Finance

This article relates to a serious cover-up in which one person died, and allegations of a near billion dollar crime against Canadians took place.------------------------------------------------------------------------------------

The rules governing examinations for discovery require litigants to disclose all documents relevant to a particular action to their opponent subject to considerations of solicitor-client privilege, litigation privilege, and settlement privilege. These rules rely on the good faith of the parties not to conceal or destroy any relevant documents.

When, however, a party suspects that the other may destroy evidence, it can ask the court for what is called an Anton Piller order without prior notice to its opponent. Such an order compels the party subject to the order to allow access to its premises to search and seize documents specified in the order so that they may be preserved for use in the litigation. Because of their intrusive nature, Anton Piller orders are issued only when the applicant is able to demonstrate (1) a strong prima facie legal claim; (2) very serious damages resulting from the defendant’s alleged misconduct in the underlying cause of action in the litigation; (3) convincing evidence that the defendant has the documents that are sought to be seized; and (4) a “real possibility” that the defendant may destroy those documents before the discovery process if they are not preserved.

In its 2007 decision in Catalyst Partners Inc. v. Meridian Packaging Ltd., [2007] A.J. No. 667 (C.A.), the Alberta Court of Appeal considered what evidence is required to satisfy the fourth of the above criteria – typically the main obstacle to obtaining an Anton Piller order. In overturning the lower court’s decision and setting aside the Anton Piller order in this case, the Court of Appeal made it clear that strong evidence showing a real possibility the defendant will destroy documents is necessary before such an extraordinary order will be granted.

The underlying litigation arose from a contract under which the defendant, Meridian, blended chemicals for the plaintiff, Catalyst. During their business dealings, Catalyst had given Meridian certain confidential information, including chemical formulas for the blending process and a list of its customers. When the parties ended their contract, Meridian did not return the confidential information to Catalyst as required under the contract and Catalyst accused of Meridian of misusing its proprietary confidential information. Catalyst then obtained an Anton Piller order on the basis that Meridian might destroy the confidential, proprietary documents relating to certain chemical formulas and customer lists in its possession if those documents were not seized and preserved.

In deciding whether to grant an Anton Piller order, courts typically infer a real risk of destruction of documentary records from evidence of dishonesty or misconduct by the defendant in relation to the underlying dispute. Here Catalyst pointed to five circumstances showing Meridian’s dishonesty and a risk that it would destroy confidential documents. The Alberta Court of Appeal concluded none of the plaintiff’s allegations supported such an inference.

Firstly, the Court of Appeal rejected Catalyst’s claim that an intention to destroy documents could be inferred from the fact that Meridian kept its confidential information. The Court accepted Meridian’s explanation that it did not return the materials simply because nobody asked it to do so.

The Court also rejected Catalyst’s second allegation – that Meridian was complicit in unfair competition against Catalyst by a former customer’s employee – finding that the link between the employee’s misconduct and alleged dishonesty by Meridian to be tenuous at best.

Similarly, the Court of Appeal refused to draw an inference of dishonesty from Meridian’s failure to fully comply with a court order that it return a certain of Catalyst’s property.

Finally, the Court of Appeal rejected Catalyst’s claims that billing irregularities by Meridian and inconsistencies between the affidavit of Meridian’s manager and his testimony on cross-examination indicated dishonesty – finding that they were more indicative of carelessness than dishonesty.

The moral of the story? An Anton Piller order, often called a civil search warrant, is a very invasive and extraordinary remedy. It infringes privacy rights and can adversely affect the reputation of a party in the community. Consequently, a party seeking an Anton Piller order cannot simply rely on information that it suspects might show the defendant in a bad light to obtain the order. In order to obtain such an order, the evidence to support an inference of dishonesty and a real risk of the destruction of relevant documents must be very strong and compelling.

Wednesday, September 19, 2007
Extensive statistical research conducted by two Ontario-based law firms concludes that many Canadian-listed companies have engaged in stock-option backdating or flouted Toronto Stock Exchange rules governing the granting of options to senior executives.

There is greater than 95% probability that at least 35 TSXlisted companies have manipulated their option grants to senior executives between Jan. 1, 1987, and Dec. 31, 2006. The likelihood of manipulation exceeds 99% for at least 10 of these companies.

"Our analysis of reports filed by insiders of TSX-listed companies and the Canadian academic literature to date strongly suggests that option manipulation is a serious problem in Canada, and that the current regulatory regime is inadequate to deter it," said Dimitri Lascaris of Siskind Cromarty Ivey &Dowler, who along with partner Charles Wright and his brother, Michael Wright, of Cavalluzzo Hayes Shilton McIntyre & Cornish, spearheaded the ground-breaking research.

Dimitri Lascaris, Charles Wright and Michael Wright,
outside the Siskinds offices, in London, Ont.
"The boards of several public companies have heard from us and many more will from here on in," Mr. Lascaris said.

Letters Siskinds sent to those companies request that they commence an "independent and thorough" investigation of stock-option practices.

"If the study's results are borne out by such an investigation, our clients will insist both on the payment of appropriate compensation and the implementation of appropriate corporate governance measures to prevent this in the future," Mr. Lascaris said.

The exact number of companies allegedly involved in option manipulation remains in flux because Siskinds has not yet completed its investigation of 25 more "suspicious" companies. "When our review of these 25 companies is complete, we expect that the list will consist of approximately 50 companies," Mr. Lascaris said.

He declined to publicly disclose the names of the businesses suspected of backdating, saying only that "a number of these companies are household names in Canada."

The total market capitalization of the 35 companies identified so far is in the $30-billion to $40-billion range. Approximately 50% of companies come from the oil, gas and mining sectors, while approximately 25% come from the technology industry. The remainder represent a wide range of industries, including retail, real estate and agriculture.

Companies grant stock options to executives as a performance incentive. Typically, the grants are at the current market price or higher, putting the options "out of the money." The idea is that executives will benefit only if the company's stock price goes up in price on their watch. By backdating options to a point in time when the share price was lower, however, companies give their executives a free pass to guaranteed profit and effectively lower returns to shareholders.

Backdating is also an attempt to get around TSX rules, which are mimicked in the provisions of many Canadian stock-option plans and prohibit granting options at less than current market price or "in the money."

Remarkably, in addition to breaches of backdating practices, the study found that some of the suspect 35 companies simply issued options at in-the-money prices, in direct breach of exchange rules. Researchers found more than 100 instances where insiders at these companies filed reports showing option grants that were made explicitly in the money.

But that's not all. The study also found insiders at companies whose records showed no evidence of backdating filed "scores of reports" showing option grants that were also explicitly in-the-money.

In other words, even where companies were not manipulating options, they were violating option rules in other ways -- and doing so right under the nose of securities regulators.

"The fact that an option was granted in violation of in-the-money rules can be established without resort to any statistical analysis," Mr. Lascaris said. "All anyone has to do is check the price of the option as stated in the insider report against the published stock price that existed on the day the insider reports as the day of the grant."

The research also revealed that many senior executives of public companies filed their insider reports late.

"I mean very late and chronically late," Mr. Lascaris said. "In some cases, the filings were more than a year late with no apparent penalty imposed or at least no apparent penalty that could be construed as deterrence."

In one case, the CFO of a public company failed to file for five years, explaining belatedly that he or she "didn't know" of the filing requirements.

"Late filing is, of course, in and of itself problematic, but it also enhances greatly the opportunities for backdating," Mr. Lascaris said.

The penalties for late filing are a maximum of $50 per day to a maximum of $1,000 per year. "The OSC can also ban an individual from acting as an officer or director or from trading in securities, but I am not aware of a single instance in which the penalty above the monetary one has been imposed for late filing," Mr. Lascaris added.

The research, if accurate, puts the lie to what many regard as the Canadian Securities Administrators' (CSA) nonchalance regarding the options' backdating problem in Canada.

On Sept. 8, 2006, the CSA published a "staff notice" highlighting the "historically different regulatory requirements in Canada that may reduce the opportunity for Canadian companies to backdate or time option grants."

In support, the notice cited various TSX and TSX Venture Exchange rules relating to option pricing and filing requirements, including those for which the law firms' research indicates a blatant and widespread disregard.

"If the intention of that notice was to mitigate concerns about the extent of options manipulation in Canada, that intention was misplaced," Mr. Lascaris said.

But Wendy Dey, the Ontario Securities Commission's director of communications, who has not had an opportunity to see the research or the results, says the OSC enforcement officials are looking at various issuers.

"We have been conducting a review of timing issues since early this year, and have developed a sophisticated model for identifying high risk companies on which we are focusing," she said. "Our continuing disclosure materials also contain questions that will help us identify companies at risk."

Ms. Dey would not provide the number of companies under review or discuss the progress of the Investigations.

"We don't talk about this kind of thing," she said, "because we have a duty to maintain a high degree of confidentiality."

To date, the OSC has announced that it is "reviewing" the option practices of precisely one Canadian company, Research In Motion. The Waterloo-based maker of the ubiquitous Blackberry is also the only Canadian company that has been sued for stock-option backdating, courtesy of a claim filed in January by Siskinds and Cavalluzzo Hayes on behalf of the Ironworkers Ontario Pension Fund, which owns 13,200 RIM shares. RIM has taken a $250-million charge against admitted errors in its option practices.

Statistical research of the kind undertaken by Siskinds has been the catalyst for option manipulation enforcement procedures and civil lawsuits in the United States. A study conducted by Erik Lie at the University of Iowa and Randall Heron at Indiana University, published in July 2006, was a primary source for Siskinds and Cavalluzzo Hayes in their initial pursuit of the matter. The study found that 29.2% of U.S. firms manipulated grants to top executives at some point between 1996 and 2005.

Siskinds faced the challenge of applying that research to the Canadian market, which involved reviewing thousands of documents at enormous cost and expenditure of time.

To help keep a handle on the costs, Siskinds applied on Aug. 22, 2006, to the Ontario Securities Commission for exemption from the fees payable for the manual retrieval and copying of insider-trading reports issued before SEDI (System for Electronic Disclosure by Insiders) became operational in the sum-mer of 2003. The firm asked the OSC to waive the $150 fee for each search of a single company's reports, and the 50¢ per page photocopying charge.

Siskinds' application was before the OSC, which is a member of the CSA, more than two weeks before the CSA published its notice about backdating, and before any Canadian company had announced a review of its option-granting practices.

Margo Paul, the OSC's director of corporate finance, took precisely a year to issue a three-page, 20-paragraph decision on August 22, 2007. She denied the application on the basis that it was not in the public interest to grant it.

Ms. Paul's order acknowledged that Siskinds' request related to a "study of alleged stock option back-dating in Canada," but she went on to observe that compiling the material would be "a substantial undertaking for the Commission requiring extensive staff resources at substantial cost."

Ms. Paul also acknowledged the law firm's argument that the preparation of the study was in the public interest "because it is alleged that manipulation of stock option grants frequently results in an understatement of executive compensation and an overstatement of corporate profits."

She concluded, however, that absorbing the costs for retrieving the material "would divert substantial funds away from other Commission priorities and would indirectly be funded by other market players."

This would put Siskinds "in a better position" than others requesting information. The order also confirms that no relief of the type sought had ever been granted by the OSC.

Ms. Dey was somewhat more sanguine in her comments.

"Let's be clear that we didn't deny Siskinds any data," she said. "What we denied them was the special privilege of using $250,000 of market participants' money to advance their agenda as a plaintiffs' class-action law firm."

Without a waiver from the OSC, however, the cost of doing a full survey in Canada became prohibitive.

"The OSC's position had the practical effect of limiting the information at which we were prepared to look," Mr. Lascaris said.

Still, in the year that the firm was awaiting Ms. Paul's decision, Siskinds had reviewed thousands of documents -- work which still continues today -- including materials from SEDI, OSC bulletins, and paper reports of insider trading, as well as proxy statements and other disclosure documents.

The firm generated a company-by-company analysis using a customized spreadsheet prepared by a backdating expert. Among other things, the spreadsheets automatically calculated the probability of error. The expert then interpreted the statistical probabilities of stock-option manipulation.

"What we discovered is that there were many companies whose stock price displayed patterns that occurred with such extraordinary frequency that only manipulation and backdating could explain them," Mr. Lascaris said.

Characterizing these patterns is a significant if not drastic decrease in the stock price in the days immediately preceding the reported grant date, and a significant increase thereafter.

"If this occurs with sufficient frequency, the likelihood of it having occurred randomly is so remote that some form of manipulation is the only reasonable explanation," Mr. Lascaris said. "Either these people were luckier than God or they were manipulating their options. Getting options repeatedly when the stock is so low is a matter of hindsight, not foresight."

Where possible, the law firms also sought "corroborating" evidence.

Although Mr. Lascaris conceded that the study's methodology is imperfect, he insisted that the findings understate the extent of the backdating.

"For example, for reasons I cannot disclose [likely including conflict of interest considerations] we did not examine any insider reports for approximately 15% of TSX listed companies," Mr. Lascaris said. "In our view, our list could comprise less than 50% of TSX-listed companies in which options' manipulation was likely to have occurred."

In any event, the two firms recently began presenting their findings to clients, mostly unions and pension funds on the roster of Cavalluzzo Hayes, one of Canada's top union-side labour law firms.

"Banks and other lending-side institutions aren't going to become involved in something like this regardless of their stake," said Michael Wright.

"They don't want to go after the [large corporations] because [these companies] could be back to them asking for a big loan one day."

Stan, when I was in the business, it was commonly known and practiced that there are two general types of rules in the industry. Those which were put in place to protect the client, and those rules which are put in place to protect the industry itself, or the firm's interests.

The ability to look the other way, ignore, or accept breaches of the client protective rules came about due to the fact that we were a self policing agency, reporting to no one really. There was often little to no slack on the inudustry protective rules, unless one was a "top commission producer", or equivalent fee generator. Those individuals were often treated to special titles, special considerations, and when push came to shove, often internal complaince officers were fired and asked to move on, when they came into conflict with these big billers. (Read FREE RIDER by John Lawrence Reynolds to learn true to life stories of such events)

On the other hand, industry rules could be suddenly used as a "weapon" against brokers who did not fall into line, or refused to remain silent on indiscretions. I have known advisors who made complaint to the firm, only to have the IDA turn around and investigate and threaten the broker. (the unspoken charge would be "not being a team player")

Another broker I know questioned the IDA about the rules on certain indiscretions, and was promptly reported to his manager by the IDA. He was called on the carpet because he went to the very regulatory agency he was supposed to report to. Insetad of an investigation, that broker is no longer employed at that major bank owned firm.

There really is no expectation among the experienced, that a self regulating industry will serve the public when forced to choose between serving itself and the public. That is what we have in Canada.

I only hope that our finance minister does not succumb to the political and optical solution, and place the very same foxes we now have, in charge of a new national agency. that would be like putting the nail in the coffin of Canada's investment reputation in the world.

A Hearing Panel of the Central Regional Council of the Mutual Fund Dealers Association of Canada (“MFDA”) has approved a Settlement Agreement between the MFDA and Altimum Mutuals Inc. (“Altimum”).

By-Laws, Rules, Policies Violated

The Hearing Panel considered the Settlement Agreement at a hearing held on June 15, 2007 in Toronto. Under the Settlement Agreement, Altimum admitted that it acted contrary to the public interest by contravening MFDA Rules 2.7.2 and 2.1.1(c) by distributingmisleading sales communications to clients.

Advertising and Sales Communications

MFDA Rule 2.7.2 states that:No Member shall issue to the public, participate in or knowingly allow its name to be used in respect of any advertisement or sales communication in connection with its business which:(a) contains any untrue statement or omission of a material fact or is otherwise false or misleading, including the use of a visual image such as a photograph, sketch, drawing, logo or graph which conveys a misleading impression;(b) contains an unjustified promise of specific results;(c) uses unrepresentative statistics to suggest unwarranted or exaggerated conclusions, or fails to identify the material assumptions made in arriving at these conclusions;(d) contains any opinion or forecast of future events which is not clearly labeled as such;(e) fails to fairly present the potential risks to the client;(f) is detrimental to the interest of the public, the Corporation or its Members; or(g) does not comply with any applicable legislation or the guidelines, policies or directives of any regulatory authority having jurisdiction over the Member.

Standard of Conduct

MFDA Rule 2.1.1 states that:Each Member and each Approved Person of a Member shall:(a) deal fairly, honestly and in good faith with its clients;(b) observe high standard of ethics and conduct in the transaction of business;(c) not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and(d) be of such character and business repute and have such experience and training as is consistent with the standards described in this Rule 2.1.1, or as may be prescribed by theCorporation.

Altimum is registered as a mutual fund dealer and a limited market dealer in Ontario. Altimum has been a Member of the MFDA since May 29, 2003.On or about July 18, 2003, Altimum entered into a referral arrangement with Portus Alternative Asset Management Inc (“Portus”). The Agreement provided that Portus would pay Altimum’s referral fees based on the amount of assets invested by their clients in Portus securities.Between December 2003 and January 2005, the Respondent received approximately $117,000 in referral fees from Portus under the terms of the agreement.In February 2005, the Ontario Securities Commission issued orders requiring Portus and its affiliates to cease trading in securities because of apparent breaches of the Securities Act, R.S.O. 1990, c. S.5 as amended. Bankruptcy and enforcement proceedings were commenced against Portus.Securities dealers that referred clients to Portus in Ontario, including Altimum voluntarily agreed to terms and conditions on their registration stipulating that the Ontario Dealers would repay clients all referral fees received from Portus. In January 2003, Altimum repaidapproximately $117,000 in referral fees to its clients.In March 2004, Altimum produced two pamphlets for the purpose of soliciting investments by clients in Portus securities and similar exempt securities. The features attributed to the investments described in the pamphlets were based primarily upon Altimum’s understanding of Portus securities.One of the pamphlets purported to promote an investment product referred to as the Retirement Security Investment Plan (“R.S.I.P.”).Altimum had obtained a registered trademark for the term R.S.I.P. prior to publishing the pamphlet. The other pamphlet described and promoted the merits of what appeared to be a unique investment tool, software or methodology called the Portfolio navigator. Neither theR.S.I.P nor the Portfolio Navigator investment process existed. Both concepts were the creation of Altimum designed to induce clients to invest in Portus securities. The pamphlets did not acknowledge that Portus was the issuer of the underlying investments being promoted.The RSIP pamphlet constituted a misleading sales communication issued to the public because it contained untrue or misleading statements, contrary to MFDA Rule 2.7.2(a), as it stated or implied that an RSIP:(a) “is the perfect Retirement Security Investment Plan”;(b) “was created for those 55 years of age and older who want to stop taking so much risk with their retirement funds”;(c) “was designed to replace G.I.C.’s in a portfolio”;(d) features benefits such as positive and consistent returns and broad diversification; and(e) operates such that an investor’s “$10,000 portfolio will be constructed in the same way as a $20,000,000 portfolio of a pension fund in Toronto if both are invested on the same day.Both portfolios will hold exactly the same investments in exactly the same proportions and both investors will pay exactly the same fees.”(f) is recognized by the Canadian government as an alternative to a Registered Retirement Savings Plan (“R.R.S.P.”) by:i. expressly contrasting an R.S.I.P. to an R.R.S.P. in a manner that suggested both were retirement investment savings vehicles sanctioned by the government;ii. making use of a similar acronym, accompanied in places by a red maple leaf;iii. stating that the RSIP was designed for individuals investing for their retirement years and seeking a tax advantaged return; andiv. including a maple leaf on the cover of the pamphlet in a manner which suggested that the R.S.I.P. was an investment product sanctioned by the government.(g) is a unique investment product and the Respondent is one of a select group of investment dealers authorized to offer it to investors, and stated that “[a]n R.S.I.P. is not available from your local bank … credit union … trust company …[or] insurance agent” and “[m]any investment dealers are not yet authorized to offer an R.S.I.P.” because they have “to meet certain minimum standards” and “stringent requirements in terms of education, experience and amount of money under management” when in fact the pamphlet was a marketing tool to promote sales of Portus securities which were widely available for purchase from any one of the other sources referred to in the pamphlet and the Respondent had not satisfied any unique or stringent standards to become eligibleto offer Portus securities to its clients.(h) The pamphlet contained unjustified promises of specific results, contrary to Rule 2.7.2(b), including “a nice, steady return of about 9% per year without a lot of volatility” and “steady growth higher than the rate of interest on G.I.C.’s”.The RSIP Pamphlet failed to present the potential risks of investing in Portus securities, contrary to Rule 2.7.2 (e).The Portfolio Navigator Pamphlet constituted a misleading sales communication that was issued to the public contrary to MFDA Rule 2.7.2 because:(a) The pamphlet contained untrue or misleading statements, contrary to Rule 2.7.2(a), as it stated or implied that:i. “[Our elite managers] can make money whether the market is going up or down….Your portfolio is managed to generate a smooth, reliable rate of return that is significantly higher than fixed income investments” when there was no reasonable basis for making such claims;ii. “Portfolio Navigator” is a special tool, software or methodology that is used exclusively by the Respondent when, in fact, the term “Portfolio Navigator” was conceived of by the Respondent and incorporated into the Respondent’s marketing pamphlet to promote interest among the Respondent’s clients in securities issued by Portus which were widely available from other market participants;iii. “We use something called Portfolio Navigator to tell us when to buy and sell. It is a process in which tools are applied to your portfolio on a daily basis, to make sure that you are investing only when the risk is low and that you are selling when the risk in the market is high” when no such tool was being applied to the Respondent’s client portfolios and there was no basis for describing the administration of Portus securities in that manner;(b) The Respondent is registered as an IC/PM and actively manages the underlying investments as the Respondent is the only corporate entity referred to in the pamphlet and the pamphlet states among other things that:i. “With Portfolio Navigator as a guide, we invest for you”; ii. includes frequent references to “Our elite managers” who make use of “technical analysis”, “short selling, leverage,market timing and hedging” and “active, discretionary money management techniques, aiming to improve the performance of your portfolio while systematically reducing risk”; andiii. “We don’t bother you with the day-to-day decisions. Our elite managers take whatever initiative is necessary and make all of the trading decisions for you;”(c) The pamphlet makes no reference to any potential risks to a client who wishes to participate in the Portfolio Navigator investment strategy, contrary to Rule 2.7.2 (e).The Respondent sent the RSIP Pamphlet and the Portfolio Navigator Pamphlet to approximately 150 clients and displayed the pamphlets in one of its offices and on its website, where clients or potential clients could obtain copies.Of the total amount of $3.3 million invested in Portus securities by clients of the Respondent, more than $2,750,000 was invested by approximately 70 of the 150 clients to whom the Respondent mailed copies of the pamphlets.The pamphlets remained on display and available on the Respondent’s website until MFDA Staff raised concerns about the pamphlets during a sales compliance review of the Respondent in February 2005. After being advised of MFDA Staff concerns, the Respondent voluntarily discontinued further distribution of the pamphlets.

It stated that the RCMP only has the resources to investigate 5% of the complaints that come to it about the investment industry.

If you add this to the idea that provincial securities commissions abrogate 100% of IDA member firms complaints directly to the IDA itself......which is kind of like referring a complaint of abuse directly to the abuser......

plus add in the idea that "Executives of public companies have one small flaw. They are optimistic almost all of the time and will never admit to anything being wrong" (Ira Gluskin, President and Chief Investment officer of Gluskin Scheff and Associates writing in the globe and mail sat, aug 13, 2005)

it all leaves me with a feeling that the canadian investment industry is under less control and oversight and I am among the most pessimistic around on that topic.

27. Why is the OSC allowing firms to systematically overcharge clients by maintaining a fee structure that is designed for the benefit of the banks and brokerage firms and not the investor? My US trading accounts charge consistently lower trading fees, but the OSC will not allow this firm to execute trades on Canadian markets. Why are we forced to pay these ridiculous fees to enrich even more the banks and brokerage firms and the IDA and the OSC when Americans don't have to?

The OSC does not regulate the commissions charged by brokerage firms.

Our understanding is that commission fees are generally lower in the US as a result of increased competition. That is to say, fees are not higher in Ontario due to additional regulation.

While firms pay registration fees to operate in the Ontario capital markets, the OSC and the IDA have been reducing fees, not increasing them.

American brokerage firms can do business in Ontario but they must register in Ontario for investor protection purposes.

What the OSC failed to respond to is the question of why they allow sales practices that are in favor of the advisor and firm instead of in favor of the client. See NASD web site in the US, for how authorities view this type of sales practices.
In particular, they address the topic of selling products that enrichen firms when alternate choices are available that would be identical but cheaper for the client. The OSC avoids this and avoids doing thier job in doing so in my opinion.